You can’t do nothing: both tax the banks more and get them lending more

ONE of these little problems this universe presents is that sometimes we want two mutually incompatible things. As in our current attitude to the banks. Firstly, we want the bastards to pay for the damage they did. But we also want them to lend much more money so we can get out of this damn recession.

Unfortunately, we can’t actually do both: the more we tax them the less capital they have which they can underwrite lending with:

The Government’s levy on banks may be sucking £15bn of credit for small and medium-sized businesses out of the UK economy, tax experts warned.

If the £2.5bn the tax is expected to bring to the Treasury’s coffers annually was left on banks’ balance sheets, that could open the door to additional lending, according to Ernst & Young’s financial services tax team.

Sadly, you just cannot have two mutually contradictory things at the same time.

If I had to choose between the two I’d say make them pay the tax. For it’s not really a tax: it’s an insurance premium. It’s an insurance premium against the next time that they need to be bailed out. And yes, they will need bailing out at some point. Might be another decade, might be another century, but banking systems do occasionally need bailing out, it’s just in the nature of the beast. But this next time around we’ll have already been paid for the costs of having to do so.

That extra $15 billion or lending isn’t going to have much effect a the moment anyway. The real shortage is of projects worth investing in, not of credit to be lent.

I don’t know how it works over there, but in the US we have Credit Unions, which are not-for-profit. I switched over a few years ago after Chase bought WAMU and I am glad I did. And we used to have the Glass-Steagall act which kept regular banking and risky “investment” banking separate – I wish we could get that back.